An Analysis of the Effects of the Presidential Election on the Market
Friday, November 8, 2024
Regardless of your political leanings, I feel pretty confident in saying that the vast majority of Americans are just glad that the election is finally over.
Understandably, investors may have a slight (or not so slight) feeling of anxiety over the ups and downs of this election year and what, if any effects it could have on the market more broadly, and your own portfolio of investments more specifically.
Times of change can often bring uncertainty. Much of the time, when things are changing and markets are moving, clients, friends and family alike ask me the inevitable question, “What’s the market going to do?” To begin with, if anyone ever tells you they know what the market is going to do today, run! My answer usually goes something like this, “In the short term, I have no idea. In the long term, it’s going up!”
I say that not because I have a crystal ball and know the future, but as a student of history and of the market, that statement is based on what’s happened in the past. I often repeat that every market downturn is simply a temporary setback on the market’s permanent advance. And that’s true, until it isn’t! How’s that for profundity? Meaning, that throughout our history each time the market has gone down, it’s gone back up, 100% of the time; so, I like our odds. The one time the market goes down and doesn’t eventually go back up, we’ll have much bigger problems than what is happening in our portfolio. Regardless of what is occurring in the headlines or in the news cycle resulting in market volatility, in the long run things will work out and the market will continue its run up and to the right.
The market is made up of companies, not political parties; and the truth is most companies adjust to whichever party is in power to produce profits for their shareholders.
Whether you’re Red or Blue in regard to politics, your money really doesn’t care who wins! At least in the short term. While you may feel passionately one way or the other, you lean left or right or are right down the middle, the market is made up of companies, not political parties; and the truth is most companies adjust to whichever party is in power to produce profits for their shareholders.
One of the most reliable patterns seen in U.S. presidential election cycles is that stock market volatility tends to increase in the months leading up to an election. The uncertainty around potential policy changes makes investors cautious, which can lead to unpredictable market movements. However, the stock market tends to stabilize, and often even rally, once the election results are in, as the reduction in uncertainty allows investors to proceed with clearer expectations.
Markets sometimes experience a “relief rally” once the election concludes, as a decrease in uncertainty can boost investor confidence. This rally can be especially pronounced if the election result is decisive, something we saw this past week, as opposed to a highly contested outcome that might introduce further volatility.
Although popular myths sometimes suggest that one party or the other is “better” for market returns, historical data simply does not bear that out. Markets are nonpartisan! And because they are, it’s incredibly important not to make investment decisions based solely on your own feelings about which party is in power. Fear is not an investment strategy. Neither is euphoria. The S&P 500 has averaged positive returns under nearly every partisan combination.
Successful investing requires FAITH, PAITIENCE, and DISCIPLINE!
The stock market’s initial reaction to an election can be immediate and pronounced. On election night and the following days, futures markets and indexes can fluctuate sharply as the results come in and investors attempt to quickly reposition based on the winner’s anticipated policies. A significant source of this volatility is speculation, as markets may react based on perceptions rather than on concrete policy.
Over the long term however, the stock market tends to react more to the actual implementation of policies rather than to election night results. This period involves market adaptations to new regulations, fiscal policies, or changes in trade relationships. Historical data shows that the overall economic and business cycle often has a greater influence on stock market performance than which party is in power, with the Federal Reserve’s monetary policy also playing a significant role.
My favorite investment advice was told to me years ago, and it’s something I often repeat; “Turn off the TV and stop listening to pundits.” Pundits will tell you there is a 40% chance of just about anything occurring at any moment.
In times of change what guides us is the realization that it’s always best to fall back on a historical perspective to provide some clarity. That historical context of the market, as we’ve seen, says that if we maintain a long-term view of investing, we’re likely to be handsomely rewarded. Will it be easy? No. Will there be head winds and more volatility in the future? Most assuredly. Will there be those that “panic sell” or go on a “FOMO buying spree”? Yes, as there always are! Are we going to be sucked in by all these high emotions and market drama? Absolutely not!
Regardless of any temporary circumstances, international events or even presidential elections, I’ll repeat my mantra; being a successful investor requires faith, patience and discipline. And to that end, we work.
Blessings for a great weekend!
The Riverfront Capital Team
(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.)
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